HBS_HP_Compaq-TheMergerDecision(9-104-048)

DoNotC[e-mail]617-783-7860.9-104-048REV:SEPTEMBER14,2004________________________________________________________________________________________________________________ProfessorKrishnaPalepuandResearchAssociateJonathanBarnettpreparedthiscase.Thiscasewasdevelopedfrompublishedsources.HBScasesaredevelopedsolelyasthebasisforclassdiscussion.Casesarenotintendedtoserveasendorsements,sourcesofprimarydata,orillustrationsofeffectiveorineffectivemanagement.Copyright©2004PresidentandFellowsofHarvardCollege.Toordercopiesorrequestpermissiontoreproducematerials,call1-800-545-7685,writeHarvardBusinessSchoolPublishing,Boston,MA02163,orgoto—electronic,mechanical,photocopying,recording,orotherwise—withoutthepermissionofHarvardBusinessSchool.KRISHNAPALEPUJONATHANBARNETTHewlett-Packard–Compaq:TheMergerDecisionForthepasttwo-and-a-halfyears,theHPBoardofDirectorsandmanagementteamhavebeenevaluatingthebeststrategicmoveforHP.Together,wedebatedthehardquestions,welookedatallthealternativesandwebecameconvincedthatamergerwithCompaqisthesinglebestwaytocreateshareownervalueandreturnHPtoindustryleadership.—HPCEOCarletonFiorina,HP2001AnnualReportWeprofoundlydisagreewithmanagement’sassertionthatHPneedstomakethislargeandveryriskyacquisition.Toundertaketheproposedmergeristomakeabig,long-term,bet-the-companymove.ItworsenstheHPstockholders’portfolioofbusinesses.Itdoesnotsolvekeystrategicproblems.Itcreatesenormousimmediateriskandintermediate-termincrementalchallenges,anditcomesataveryhighprice.—HPDissidentBoardMemberWalterHewlett,2001ProxyStatementOnMarch19,2002,amidboosfromtheaudienceataspecialmeetingforshareholders,Carleton(Carly)Fiorina,presidentandCEOofHewlett-Packard(HP),announcedtheshareholders’approvaloftheacquisitionofrivalCompaqComputerbya“slimbutsufficient”51.4%margin.Thecontroversial$24billiondealmarkedthelargestmergerinthehistoryofthecomputerindustry.Atitscore,themergerwasdesignedtocreateaglobaltechnologypowerhousethatcouldprovideend-to-endproductsandservicesincreasinglydemandedbylucrativeenterprise(large-scalebusiness)customers.Insodoing,themergerwouldpositionthecombinedcompanytochallengeindustryleaderIBM.TheMarch19meetingcappedoffabittersix-monthproxyfightthatpittedHPheiranddissidentHPboardmemberWalterHewlett,whoopposedthemerger,againstHP’snewCEOanditsremainingboardmembers,whofavoredtheacquisition.WhenHPfirstannounceditsintentiontoacquireCompaqonSeptember4,2001,1thenewssentHP’sandCompaq’sstockpricesdownapproximately19%and10%,respectively.Somesevenmonthslater,onthedayoftheMarch19meeting,sharesofHPandCompaqcontinuedtotrailpreannouncementlevelsby19%and10%,respectively.Theslimapprovalmargincoupledwiththeseverityofthemarket’sreactionleftmanywonderingwhetherthedealwasagoodone.1HPandCompaqissuedajointpressreleaseannouncingtheirintentiontomergelateintheeveningonSeptember3,2001.September4,2001,wasthefirsttradingdaythatreflectedthemergernews.DoNotC[e-mail]617-783-7860.104-048Hewlett-Packard–Compaq:TheMergerDecision2IndustryBackgroundThecomputerhardwareindustryin2001washighlycompetitiveandmarkedbyfrequentproductintroductions,continuousimprovementinproductprice/performancecharacteristics,andfiercecompetition.Inthefaceofcontinuouschange,participantswereeitherabletoquicklytailortheirproductandserviceofferingsinawaythatallowedthemtooperateprofitably,ortheywereacquiredordissolved.IBMandDellwereexamplesoffirmsthatsucceededbypursuingdivergentstrategies.IBMpursuedafull-serviceprovidermodelandwaswellentrenchedinhigh-growth,high-marginbusinesses.Dellpursuedafocusstrategy,centeredprincipallyonlower-marginsegmentsoftheindustry—personalcomputers(PCs)andservers.Compaq,oncetheindustryleaderinPCs,facedsignificantchallengesasittriedtoregainitspositionintheindustrythroughaseriesofacquisitionsthatprovedsomewhatdifficulttodigest.IBMIBMintroduceditsfirstcomputerin1952.Throughoutthe1960sand1970s,IBM’scombinedstrengthinresearchanddevelopment(R&D)andmarketingearneditmarketsharenear80%.In1981,theIBMPCwasintroduced,givingrisetoaPCindustrybasedonMicrosoft’sWindowsoperatingsystemandIntel’scomputerchips(collectivelyreferredtoasthe“Wintel”standard).BecauseWintelstandardswereopenandavailabletoallPCmanufacturers,manyPCclonemanufacturersenteredtocompetewithIBM.Compaqinitially,andDelllateron,becamethePCindustryleader,posingsignificantchallengesforIBM.Asaresultofrapidadvancesincomputingpower,PCswereincreasinglyabletohandlecomplexcomputingtasks,challengingtheroleofhigh-pricedmainframecomputers,whichwerethemainstayofIBM.Asaresult,afterearning$6.6billionin1984,IBMbegantoerodeinperformance.In1992,IBMlost$5billion,andin1993lossesgrewtonearly$8billion,makingittheworstyearinIBM’shistory.Thatsameyear,CEOJohnAkerswasreplacedbyLouisGerstner,thefirstoutsidertorunthecompany.GerstnersetanewcourseforIBM